Happy Birthday to Porter... Goldman's earnings... Clark calls a bounce... What is off balance sheet?... Alliance members say we're not so "skanky" after all... It's not time to sell Buffett...

Goldsmith comment: It's Porter's birthday, so he's taking the day off to spend time with his family.

About two months back, Porter wrote: For the last year, we've been telling Goldsmith that Goldman Sachs (GS) must soon take a huge charge against earnings – more than $1 billion – because of inevitable mistakes made by its trading group and the huge amount of leverage the company employs (debt totals $431 billion). Young Goldsmith seems to believe that Goldman's traders walk on water...

Well, Old Porter, I guess those traders will "stay afloat" a bit longer... Goldman today announced that net income for the quarter rose 2% to a record $3.22 billion ($7.01 per share). Net revenue rose to $10.7 billion from $10.2 billion last year. Analysts expected the firm to earn $6.61 per share. The bank attributed its higher earnings to its trading group.

More from Wall Street's golden child... After the lagging performance of Goldman's two quant funds, Global Alpha and Global Equity Opportunities, Goldman will now launch a $10 billion hedge fund focused on old-fashioned stock picking.

From a recent 13-D filing... Hedge fund Citadel owns 45 million shares (9.7%) of beaten-down online broker E*Trade (ETFC). At the end of November, Citadel bought billions in asset-backed securities from E*Trade for $800 million. The hedge fund also picked up 10 million shares, and almost $2 billion in bonds.

E*Trade shares gained 1.3% on the news, but are still down 83% since August.

This from Inside Strategist editor Graham Summers: Companies on the S&P 500 bought back $172 billion worth of stock in the third quarter, up 56% from the same time last year and blowing past the former record of $158 billion set in the second quarter this year.

Over the last three years, buybacks have reduced the total number of shares outstanding on the S&P 500 by 12%.

Advertisement

Jeff Clark is calling a rebound... "The market is down three days in a row, and it's getting overdone on the downside. Many technical indicators are now stretched far enough that we could see a sharp oversold bounce." Read his complete forecast in today's Growth Stock Wire.

U.S. states are short almost 27% ($731 billion) in pension and benefit payments to retirees over the next 30 years.

New highs: none.

Well 'Ignorant Dupe', I hope I'm not too boring today. I like to leave the long-winded rants to the boss... He's much better at them. Give him some ammo: feedback@stansberryresearch.com.

"Did I get scammed by my Alliance membership? If so, I can only hope that everybody has a chance to get scammed at least once in their lifetime. I joined the Alliance in 2005, had more than paid for the initial investment by 2006, and now consider my Alliance membership the greatest dividend-paying asset I can own. Not only do I receive a relatively steady income from the picks from your original services, but you have included excellent new newsletters such as the Dividend Grabber and the revamped Short Report – definite dividend increases in my eyes! In addition to that are the thought-provoking and always entertaining daily e-mails. I figure in ten years you will have refined and added to your stable of newsletters, and my portfolio will have grown so much as a result of it, that I will be making my original investment back every few months. In one way I am glad that some people consider this a scam, because they are honestly too dumb to deserve such riches. On the other hand, a fear of mine is that you will eventually get disgusted with the nay-sayers out there and discontinue your service. For the sake of my heirs, please don't! And to be honest, I would probably pay to receive the entertainment in those daily e-mails! I am not sure what is more important to me: your thoughts on the world, or the reactions of the people who write in to challenge your views. Their attitudes and whininess tell me quite a bit about the state of the nation today, unfortunately. Looking forward to next year's Alliance convention. How about a trip to California?" – Paid-up subscriber Rich Gustafson

"I am one of the Alliance members that shelled out $2,900 several years ago. I had been subscribing to True Wealth and Porter Stansberry for a number of years and I had decided a long-time ago that the research I was receiving was worth every dime, so I bit the bullet and paid the money. That was a lot of money for me, and at the time I was not sure I did the right thing. Several years later I can't believe the deal that I received. I am getting thousands of dollars worth of material – almost more than I can keep up with – for a measly $150/yr. maintenance fee. I am a genius. Also I don't get all of the 'annoying' advertisements that so many complain about in The Digest. The best money I ever spent." – Paid-up subscriber Lynn Habrowski

"Well, well well... I think that for the most part people are ignorant of the way the world of business turns... in esscence... the axis never changes... ie profiting from a product that we bought for less and sold for more... whether it be information or just plain fish eggs. Not everybody likes caviar and who in their right mind buys caviar when they have no money? An addict maybe? But, I always say, don't knock it till you try it. It could be a very expensive habit to avoid. On the other hand... I am a sucker for a good infomercial... if it sounds that great, I think that it might be just that, or it may not be at all. It all comes down to the return policy. If you don't like it after thirty days send it back. Don't be cry baby and save your crocodile tears for your mama and above all when it comes to investing your hard earned dollars only invest what you can afford to lose. The choice is always up to you. No one forces anyone to do anything in this business. If you like it buy it. If you don't, pass it up or get your refund and leave these guys alone. I'm sure they regret their mistakes but if they made a buck or two on selling your name and you are upset about it, tough luck. They've made a conscious decision about their business and their sub list to allow you and me the opportunity to review and compare what's out there. It is still our choice to subscribe or not. I apreciate the fact that I get to review various pieces of information that's only privy to a handful of people. Us. Some of it might be junk and some of it might be treasure. Making money is not easy nowadays. We subscribe to get choices based on honest research and I believe that's what we get here at Stansberry. You just have to sift through it all and make a wise choice. The money will come soon enough. Keep it coming guys. I like it!" – Paid-up subscriber EC

Advertisement

"Would Porter explain in simple English how companies can hide assets 'off-balance sheet' and then repatriate them on their official balance sheet at a huge loss. Why are they allowed to hide them from view? Where is transparency in accounting? And how can an average investor detect these off-balance sheet items before they hit the press?" – Paid-up subscriber Marion

Ferris comment: "Off balance sheet financing" refers to financing arrangements that don't affect a company's ability to borrow... as reflected by all the typical metrics a lender would consider.

A current example is any business, like the mortgage business, that relies on securitizations. An off balance sheet entity is formed to buy the mortgages in order to securitize them. Technically speaking, the mortgages no longer belong to the company, so it doesn't report them on its balance sheet. Nor is the securitization trust's debt recourse to the company (the company isn't liable for defaults), so it's off the balance sheet, too. Virtually all asset-backed securities are handled this way.

The transparency in accounting, believe it or not, is better than it's ever been. And I've learned from experience that there are times when a company shouldn't report certain levels of detail. For example, while attending the annual meeting of one company, I heard a story about a small public manufacturing company breaking out department-level details for profit margins. Its customers saw it, thought they were getting hosed, promptly called up, and demanded a price cut. Its competitors saw it too, called the company's customers, and undercut it.

Regards,

Sean Goldsmith
Baltimore, Maryland
December 18, 2007

SELL BUFFETT... Yesterday morning, my copy of Barron's screamed absurdities.

Inside, I found headlines including "Buffett's Baby Is Too Rich" and "Sorry, Warren, Your Stock's Too Pricey." I bet a lot of people read the story, called their brokers, and jumped ship. The stock dropped nearly 5%.

But we should take Barron's opinion with a grain of salt.

You see, Barron's likes to take aim at high-flying companies... It's great for the shock-value, and it sells a lot of magazines. However, Barron's isn't always right. A lot of the time, it's way wrong...

Take the July 18, 2005, issue for example:

"CRUNCH... The fat years are over for defense contractors," the magazine declared. In the following two and a half years, defense stocks rallied by nearly 100%.

Or the January 1, 2007, issue:

"AT&T Unplugged," this cover declared. AT&T was up about 41% in 2006 as hype about the company's merger with BellSouth grew. Barron's predicted that this new juggernaut couldn't compete and the stock price would fall by at least 15%-30%. In fact, AT&T has rallied by 17.5%.

Berkshire Hathaway is up about 23% this year. However, instead of crashing as Barron's predicts, I think it will go the way of the defense contractors and AT&T.

Let's see where Barron's went wrong...  

Given Berkshire's high value relative to its book value and earnings, the stock could be dead money for at least a year – and it might even decline, as it did last week...

There may be better values in the financial sector, including the depressed shares of quality companies such as American International Group (AIG), Wells Fargo (WFC) and American Express (AXP). [Emphases mine.]

So, according to Barron's, Berkshire is overvalued on a book-value basis, but American Express is depressed. Let's take a look...

Which Is the Better Value?

Berkshire has a lower price/book than American Express and Wells Fargo, and roughly the same as American International Group's.

As far as price/earnings goes, at 15.9 Berkshire's is the highest, but not by much (American Express sells for about 15.2 times earnings). Also, Berkshire's P/E hasn't been this low since 1982, at the end of a 1.5-year bear market in stocks.

So, yes, Berkshire has done phenomenally well this year... but no, it is not time to sell Buffett.

Good investing,

Ian Davis 

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame